Brazil’s unemployment rate fell to 5.3% in August 2012
Brazil’s unemployment rate fell to 5.3% in August, well below the market’s consensus of 5.6%. On a seasonally adjusted basis, unemployment fell from 5.7% in June and 5.3% in July to 5.2% in August, establishing a new all-time low for this indicator. Looking forward, the strength of the August employment report suggests a less favorable balance of risks for inflation.

 

FACTS:Brazil’s unemployment rate fell to 5.3% in August, well below the market’s consensus of 5.6%. The IBGE (national statistics office) also reported that the unemployment rate had stood at 5.4% in July and 5.9% in June. Because of a strike, until now, the IBGE hadn’t published unemployment data for certain cities and consequently, hadn’t reported the national unemployment rate for those months. On a seasonally adjusted basis, unemployment fell from 5.7% in June and 5.3% in July to 5.2% in August, establishing a new all-time low for this indicator.The decline in the unemployment was mostly the result of sustained growth of the employment level (on average, 1.6% y/y over the last three months) that outpaced the expansion of the labor force (on average, of 1% y/y over the last three months). Seasonally adjusted, payrolls grew by 0.24% m/m in August, after contracting by 0.3% and 0.6% m/m in the preceding two months. The steep decline in unemployment in July/June is explained by the fact that the labor force contracted at a faster pace than payrolls, by 0.8%. In August, both payroll and the labor force grew at about the same pace, allowing seasonally adjusted unemployment to inch lower to the new all-time low.

Tight job market conditions continued to pressure wages, but at a more modest pace than in 1H2012. Average real wages expanded by 7.9% y/y (+2.3% in real terms) in August, after rising by 6.5% y/y (+0.9% in real terms) in July. During the first half of the year, averages wages had grown on average by 10.3% y/y in nominal terms (+4.8% in real terms). Remember, however, that wage growth in 1H2012 probably received a boost from the 14.3% minimum wage hike.

IMPLICATIONS:

Augusts’ unemployment surprise strongly reinforces perceptions that Brazil’s labor market remains exceptionally (and surprisingly) tight despite the economic slowdown since the beginning of 2011.

Expectations that the economy will experience a rebound before the end of the year with the job market already tight as it is and a worse trade-off between growth and inflation helps explains investor unease regarding the outlook for inflation.

With regards to monetary policy, the strength of the August employment report may reinforce sentiment that the Central Bank is done with the easing cycle. On the other hand,  Analists forecasts a final 25 bps policy rate cut at the October Copom meeting, to 7.25%. To better gouge the likelihood of this final rate cut and the outlook for monetary policy in 2013, investors should wait for the Central Bank to publish its quarterly inflation report at the end of this month.

In that document, the Central Bank is expected to discuss the impact of the government’s tax relief measures and other recent developments on its inflation forecasts and on the balance of risks for inflation. That said, however, the August employment report suggests that this balance of risks is less favorable than before.